China's central bank slashes mortgage reference rate to tackle property crisis

2/21/2024 4:40:14 AM

(MENAFN) In a bid to address an enduring property crisis, China's central bank has taken unprecedented measures by slashing its key mortgage reference rate. The People’s Bank of China (PBOC) declared on Tuesday that it would reduce its five-year loan prime rate (LPR) from 4.2 percent to 3.95 percent, while maintaining the one-year LPR at 3.45 percent.

This 25 basis point reduction in the five-year LPR marks the largest cut the central bank has implemented since its overhaul of the LPR system in 2019. In August of that year, the central bank announced the transition to the LPR as the new benchmark rates for lending by Chinese banks.

Furthermore, the recent cut represents the initial reduction to the five-year LPR since June 2023. The LPR, functioning as the rate at which commercial banks extend loans to their top-tier clients, plays a crucial role in shaping borrowing costs within the economy. Typically, the five-year rate serves as a benchmark for mortgages, indicating its significance in influencing the housing market and homeownership costs.

“Today’s 25 (basis point) cut to the five-year LPR is clearly aimed at supporting the housing market,” analysts from Capital Economics conveyed their insights in a note issued on Tuesday.

“On its own, it will not revive new home sales. But coupled with efforts to provide increased credit support to developers, today’s cut should help to reduce pressure on the property sector somewhat,” they stated.

Since 2021, China's economy has grappled with the repercussions of a real estate downturn initiated by a government crackdown on developers' borrowing practices. This regulatory intervention precipitated a liquidity crisis within the sector, setting off a chain reaction of economic challenges.

Consequently, the property market has experienced a protracted slump characterized by dwindling investment and sales activity. The downturn has led to a wave of defaults among major developers, with Evergrande, formerly the nation's second-largest homebuilder, being compelled to undergo liquidation as mandated last month.

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